Drug insurance and the strategic behavior of drug manufacturers: Evergreening and generic entry after Medicare Part D

For branded drug manufacturers, maintaining market power by managing product lifecycle – evergreening – is an important tool to navigate pharmaceutical markets. For generic manufacturers, the key decision is to enter the market at all. Expansion of drug insurance may lead firms to change their behavior because of increased demand-side market power – due to consolidation of buyers into a small number of insurers – and because of increased drug utilization. We analyze manufacturer responses to such changes through the introduction of Medicare Part D, which expanded drug coverage among seniors, in a difference-in-differences design comparing drugs used frequently by those over age 65 to those used infrequently by this population. The results show that Part D reduced generic entry, and suggest that it increased evergreening. Furthermore, while these effects are associated with higher drug prices, they are more than offset by the consolidation of demand, reducing prices overall.